NEW YORK – Apple Computer Inc. (AAPL) on Monday said it would prepay $1.25 billion to secure its supply of flash memory used in its market-dominating iPod music players amid an expected surge in demand for the chips.
Apple said it would make the payment over the next three months in a series of agreements to lock up flash supply through 2010 with five leading manufacturers: Hynix Semiconductor Inc., Intel Corp. (INTC), Micron Technology Inc. (MU), Samsung Electronics Co. Ltd. and Toshiba Corp.
"It's critical that [Apple] tie up capacity," said Jefferies & Co. analyst John Lau. "They need to secure a reliable source to fund their continued expansion into this area."
Apple, which uses the chips in its portable iPod Shuffle and recently introduced Nano music players, has sought in recent weeks to ensure a greater supply going forward.
The company had held ill-fated talks with No. 1 manufacturer Samsung to invest in flash chip production earlier this year.
NAND memory chips are also widely used in digital cameras and photo-snapping cellular phones because they can retain data with little power. Industry-wide growth in flash memory sales topped 30 percent in the latest quarter.
In another sign of growing demand, Intel and Micron on Monday announced the formation of a new company to manufacture NAND chips, with an initial investment of $1.2 billion each.
Apple uses about one-quarter of total NAND supply now under production and is expected to be the largest customer for the venture between Intel and Micron, according to ThinkEquity Partners analyst Eric Ross.
"We want to be able to produce as many of our wildly popular iPods as the market demands," Apple Chief Executive Steve Jobs said.
The company has sold more than 30 million iPods to date.
Apple shares were down 67 cents, or 1 percent, at $63.89 in morning Nasdaq trade.